LONDON: The yield premium investors demand for holding Italian bonds over top-rated German peers jumped on Thursday to its highest since January as investors fretted about a confrontation between a new government and the ECB over debt forgiveness.
Italy’s two anti-establishment parties met on Thursday to finalise a governing accord that would slash taxes, ramp up welfare spending and pose the biggest challenge to the European Union since Britain voted to leave the bloc two years ago.
On Wednesday, markets were jolted after details of draft coalition document showed plans to ask the European Central Bank to forgive the 250 billion euros ($294.70 billion) in debt.
While few investors see that as either a realistic proposal or one that would remain in the coalition’s agenda, the tone toward euro zone rules was seen as confrontational and spooked some investors.
“The focus has clearly shifted for investors towards the kind of policies the new coalition government will come up with but despite the surge in Italian yields, we are still a long way from the kind of swings at the height of the euro zone debt crisis,” said Marc-Henri Thoumin, a rates strategist at Societe Generale in London.
Borrowing costs in Italy jumped for a second consecutive day, pushing the gap between Italian and German 10-year bond yields to 156 basis points, its widest since early January. ,. It stood at around 130 bps earlier this week.
SPANISH APPETITE
Benchmark yields on 10-year Italian government debt rose 8 basis points to a near three-month high at 2.18 percent . On a two-day basis, it was the biggest rise since March 2017.
“BTPs should remain under pressure in the near term burdened by the political situation with the overall market sentiment remaining cautious as investors are moderately long” said Orlando Green, interest rate strategist at Credit Agricole CIB in London referring to Italian government debt.
The spike in Italian debt rippled over to other peripheral bonds at a time when concerns of a pull back in policy accomodation by the world’s major central banks and rich valuations have weighed on investors’ minds.
Yields on benchmark 10-year Portuguese debt rising to a two-month high at 1.82 percent.
But contagion effects was largely limited as an auction from Spain received healthy demand from investors with Spain selling 4.4 billion euros ($5.20 billion) with a bid-to-cover ratio of 1.8 times, broadly in line with previous auctions.
David Zahn, head of European fixed income at Franklin Templeton, said this week that he remained positive on the outlook for Spanish debt because of improving fundamentals.
On a year-to-date basis, Spain and Greece are the best performing bond markets this year in Europe with returns of more than 2 percent each, according to Thomson Reuters data.
But with US and core German yields pushing higher in recent days, the headroom for yields in peripheral markets to narrow substantially from present levels is shrinking rapidly.
In early trading on Thursday, benchmark 10-year US Treasury yields rose to a near seven-year high of 3.12 percent while yields on two-year maturities climbed to its highest since August 2008 at 2.59 percent.
Source: Brecorder
